The following discussion should be read in conjunction with the Financial Statements and Notes filed herewith. Our fiscal year ends March 31. This document contains certain forward-looking statements regarding anticipated trends in our financial condition and results of operations and our business strategy. (See Part I, Item 1A, "Risk Factors "). These forward-looking statements are based largely on our current expectations and are subject to a number of risks and uncertainties. Actual results could differ materially from these forward-looking statements. Important factors to consider in evaluating such forward-looking statements include (i) changes in external factors or in our internal budgeting process which might impact trends in our results of operations; (ii) unanticipated working capital or other cash requirements; (iii) changes in our business strategy or an inability to execute our strategy due to unanticipated changes in the industries in which we operate; and (iv) various competitive market factors that may prevent us from competing successfully in the marketplace.

Statements included in this Annual Report that do not relate to present or historical conditions are called "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Such forward-looking statements involve known and unknown risks and uncertainties and other factors that could cause actual results or outcomes to differ materially from those expressed in, or implied by, the forward-looking statements. Forward-looking statements may include, without limitation, statements relating to our plans, strategies, objectives, expectations and intentions. Words such as "believes," "forecasts," "intends," "possible," "estimates," "anticipates," "expects," "plans," "should," "could," "will," and similar expressions are intended to identify forward-looking statements. Our ability to predict or project future results or the effect of events on our operating results is inherently uncertain. Forward-looking statements should not be read as a guarantee of future performance or results, and will not necessarily be accurate indications of the times at, or by which, such performance or results will be achieved.

OVERVIEW

Our primary objectives for the fiscal year ended March 31, 2009 ("Fiscal 2009") were to:

· increase the revenues by expanding our product lines and customer base;

· continue to drive down the operating costs;

· turn the operations to profit;

· obtain better financing facilities; and

· raise additional equity.

We believe that our efforts to meet our goals in Fiscal 2009 were adversely affected by the decline in worldwide economic conditions. More specifically, we experienced increased competitive pricing pressures, lack of stability and confidence in the retail market, a substantial increase of returned goods, quality issues with one of our major suppliers, and additional startup expenses associated with our logistics operation. During Fiscal 2009, our revenue has decreased by 6.7%, and gross margin decreased by 3.8% while total operating expenses increased by 5.9%. Our decrease in revenue was primarily due to one our large customers, Circuit City, filing for bankruptcy protection and therefore not electing to purchase inventory we had manufactured for them and increased pricing and return concessions due to economic conditions. We also experienced increased operating costs due to freight expense associated with returns and startup costs associated with our logistics operations. We did secure what we believe to be more favorable financing facility of $13 million with DBS Bank during Fiscal 2009. We also issued approximately $472,000 of equity in exchange for reduced accounts payable with some of our vendors. However, due to our net loss and reduced shareholder's equity in Fiscal 2009 we have again been out of compliance with the AMEX's listing requirements. As a result, AMEX notified the Company on June 23, 2009 that the Company was still not in compliance with its listing requirements and that AMEX had determined that it is appropriate to initiate immediate delisting proceedings at this time. The Company has until June 29, 2009 to formally appeal AMEX's decision, after which time the AMEX Staff's determination will become final and AMEX will suspend trading in the Company's securities and file an application with the SEC to strike the Company's common stock from listing and registration on AMEX in accordance with
Section 12 of the Exchange Act and the rules promulgated thereunder. Our board of directors has decided at this time that it is not in the best interest of the Company and its shareholders to expend the financial resources necessary to appeal the decision and continue to be listed on AMEX, particularly in light of the fact that the Company's appeal would likely have little chance of success. The Company is currently seeking to have its common stock quoted on the OTCBB. Once the AMEX delists our securities from trading on its exchange, we could face significant material adverse consequences, including:

• a limited availability of market quotations for our securities;

• a reduced liquidity with respect to our securities;

• a determination that our common stock is a "penny stock" which will require brokers trading in our common stock to adhere to more stringent rules, possibly resulting in a reduced level of trading activity in the secondary trading market for our common stock; and

• a decreased ability to issue additional securities or obtain additional financing in the future. There is no guarantee that our common stock will be accepted for quotation on the OTCBB or that if our common stock is quoted on the OTCBB, that the price of our common stock will not decline further.

RESULTS OF OPERATIONS

The following table sets forth, for the periods indicated, certain income and expense items expressed as a percentage of the Company's total revenues:

                                          2009        2008        2007
Total Revenues                           100.0 %     100.0 %     100.0 %
Cost of Sales                             81.3 %      77.5 %      77.1 %
Operating Expenses                        25.1 %      22.1 %      29.2 %
Operating (Loss) Income                   -6.4 %       0.5 %      -6.4 %
Other (Expenses), Income, net             -0.4 %      -0.5 %      -0.1 %
(Loss) Income before Taxes                -6.8 %       0.1 %      -6.5 %
(Provision) Benefit for Income Taxes      -0.1 %       0.0 %       9.2 %
Net (Loss) Income                         -6.9 %       0.1 %       2.8 %

FISCAL YEAR ENDED MARCH 31, 2009 COMPARED WITH FISCAL YEAR ENDED MARCH 31, 2008

Net sales for Fiscal 2009 were approximately $31.8 million. This represents a decrease of approximately $2.1 million as compared to approximately $34.1 million in the fiscal year ended March 31, 2008 ("Fiscal 2008"). The decrease in net sales was primarily due to a $2.4 million decrease in sales for our Bratz licensed products. We believe this reduction is primarily due to the ongoing litigation between Mattel and MGA Entertainment over the alleged intellectual property infringement of the "Bratz" dolls by MGA Entertainment. We did experience a slight increase in sales of karaoke products which partially offset the $2.4 million reduction in revenue from licensed products, however we missed additional sales opportunities caused by late shipments from vendors and declining economic conditions which led to increased return and price concessions. In addition, the bankruptcy filing of Circuit City presented an additional lost revenue opportunity of approximately $1.0 million.

We continue to develop additional features to our karaoke line to maintain and grow this core product. Music now accounts for less that 1% of total revenue due to the overall CD sales decline in the entire music industry. In an attempt to regain this revenue stream we have recently launched a music download program on our internet website to supplement our distribution of CDG discs.

Gross profit for Fiscal 2009 was approximately $5.9 million or 18.7% of total revenues compared to approximately $7.7 million or 22.5% of sales for Fiscal 2008 (a decrease of $1.8 million). This decrease was primarily due to the decrease in sales which accounted for approximately $400,000 of the decrease in gross profit with the 3.8% decline in gross margin accounting for the remaining decrease. Heavily discounted sales of excess Bratz licensed product contributed approximately 0.6% to the decreased margin. The remaining decline was primarily due to competitive pricing pressures and declining worldwide economic conditions which lead to increased discounts, markdowns and return concessions to major retailers.

Our gross profit may not be comparable to those of other entities, since some entities include the costs of warehousing, inspection, freight charges and other distribution costs in their cost of sales. We account for the above expenses as operating expenses and classify them under the selling expenses.

Operating expenses, including depreciation and amortization, for Fiscal 2009 increased from approximately $7.5 million to approximately $8.0 million, an increase of approximately $0.5 million or 5.9% compared to the same period last year. The increase in operating expenses consists of approximately $0.2 million increase in selling expenses, which include advertising, commission, freight and royalty expenses. The increase is primarily due to an increase in freight expense associated with increased volume of returns from our customers. General and administrative expenses increased $0.1 million and depreciation expenses increased approximately $0.2 million accounting for the remaining increase in operating expenses.

Our depreciation and amortization expenses were $459,354 for Fiscal 2009 compared to $311,273 for Fiscal 2008. The fixed assets mainly consist of the tools and molds, which are depreciated with three years straight-line method. During the past year we have invested in approximately $500,000 in tooling for new karaoke models as well as approximately $85,000 in warehouse equipment for the logistics operation as well as an additional $132,000 for a new business computer system and accessories. These additions are the primary reason for the increase in depreciation expense over the prior fiscal year.

Net other expense was $131,755 in Fiscal 2009 compared to net other expense of $154,672 in Fiscal 2008. The decrease was primarily due to the decrease of our borrowing cost from our new factoring arrangement with DBS Bank.

We had a loss before taxes of $2,154,563 in Fiscal 2009 compared to income before taxes of $1,712 in Fiscal 2008. The decrease in profit was primarily due to declining worldwide economic conditions which lead to decreased sales, decreased profit margins due to competitive pricing pressures and increased selling expenses associated with freight increases relating to increased returns.

Significant management judgment is required in developing our provisions for income taxes, including the determination of foreign tax liabilities, deferred tax assets and liabilities and any valuation allowances that might be required against deferred tax assets. Management evaluates its ability to realize its deferred tax assets on a quarterly basis and adjusts its valuation allowance when it believes that it is not likely to be realized. On March 31, 2009 and 2008, we had gross deferred tax assets of approximately $ 3.1 million and approximately $2.5 million, against which we recorded valuation allowances totaling approximately $ 3.1 million and approximately $2.5 million, respectively.

For Fiscal 2009, the provision for income taxes increased by $36,652 as compared to Fiscal 2008 due to an unexpected payment made for alternative minimum tax. We did not record any additional income tax expense for Fiscal 2009. This occurred because the Company had taxable losses for the U.S. operations and the Macau subsidiary is exempt from income tax according to the Macau Offshore Company (MOC) regulations.

We operate within multiple taxing jurisdictions and are subject to audit in those jurisdictions. Because of the complex issues involved, any claims can require an extended period to resolve. In management's opinion, adequate provisions for income taxes have been made.

As a result of the foregoing, we had net loss of approximately $2,191,215 in Fiscal 2009 from operations as compared to a net income of $1,712 in Fiscal 2008.

FISCAL YEAR ENDED MARCH 31, 2008 COMPARED WITH FISCAL YEAR ENDED MARCH 31, 2007

Net sales for Fiscal 2008 were approximately $34.1 million, an increase of approximately $7.4 million from approximately $26.7 million for the fiscal year ended March 31, 2007 ("Fiscal 2007"). The increase in net sales was primarily due to the sales increase for the Bratz licensed products of $4 million and the Musical instrument of $2.5 million, as well as the small increase in karaoke products sales. The music CD sales continued to decrease from approximately $700,000 in Fiscal 2007 to less than $100,000 in Fiscal 2008 due to the overall CD sales decline in the entire music industry.

In Fiscal 2008, 59% of our sales were direct sales, which represent sales made by International SMC and SMC Macau, and 41% were domestic sales, which represents sales made from our warehouses in the U.S. The ratio is very similar to that of Fiscal 2007.

Gross profit for Fiscal 2008 was approximately $7.7 million or 22.5% of total revenues compared to approximately $6.1 million or 22.9% of sales for Fiscal 2007. The increase in gross margin, compared to the prior year, was primarily due to a better pricing model. However, the higher profit margin was partially offset by the cost increase in China and the lower music sales. The music sales usually yielded a higher margin than that of the hardware sales.

Our gross profit may not be comparable to those of other entities, since some entities include the costs of warehousing, inspection, freight charges and other distribution costs in their cost of sales. We account for the above expenses as operating expenses and classify them under the selling expenses.

Operating expenses, including depreciation and amortization, for Fiscal 2008 decreased from approximately $7.8 million to approximately $7.5 million, a decrease of approximately $0.3 million or 3.7% compared to the same period last year. The decrease in operating expenses consists of approximately $0.6 million increase in selling expenses, which include advertising, commission, freight and royalty expenses, and an approximately $0.9 million decrease in general and administration expenses. The increase of selling expenses was proportional to the increase of the revenues. The decrease of the general and administrative expenses was primarily due to reductions in warehouse expenses and compensation expenses.

Our depreciation and amortization expenses were $311,273 for Fiscal 2008 compared to $556,051 for Fiscal 2007. The fixed assets mainly consist of the tools and molds, which are depreciated with three years straight-line method. In the past three years, we have utilized some existing tools and molds for the new product designs. It helps drive down the tooling cost. We have also improved the product design process, which allow us to make fewer models of new products with higher sales volume for each models.

Net other expense was $154,672 in Fiscal 2008 compared to net other income of $13,327 in Fiscal 2007. The increase was primarily due to the increase of the borrowing cost. The higher borrowing cost was a result of the higher domestic sales, which required a longer term to finance inventory and accounts receivable.

We had an income before taxes of $1,712 in Fiscal 2008 compared to a loss before taxes of $1,714,988 in Fiscal 2007. The improved profit was a result of higher revenues and successfully lowering operating expenses.

Significant management judgment is required in developing our provisions for income taxes, including the determination of foreign tax liabilities, deferred tax assets and liabilities and any valuation allowances that might be required against deferred tax assets. Management evaluates its ability to realize its deferred tax assets on a quarterly basis and adjusts its valuation allowance when it believes that it is not likely to be realized. On March 31, 2008 and 2007, we had gross deferred tax assets of approximately $ 2.5 million and approximately $2.7 million, against which we recorded valuation allowances totaling approximately $ 2.5 million and approximately $2.7 million, respectively.

For Fiscal 2008 and Fiscal 2007, we did not record any income tax expense. This occurred because the Company had taxable losses for the US operations and the Macau subsidiary is exempt from income tax according to the Macau Offshore Company (MOC) regulations.

The Company's former wholly-owned subsidiary, International SMC (HK) Limited had applied for an exemption of income tax in Hong Kong. Therefore, no taxes had been expensed or provided for at International SMC (HK) Limited. Although no decision has been reached by the governing body, the parent company had reached the decision to provide for the possibility that the exemption could be denied and accordingly had recorded a provision of $2,453,576 in the consolidated financial statements for Hong Kong taxes in the fiscal years ended March 31, 2003, March 31,2002 and March 31, 2001.

As a result of restructuring its operations in China, the Company established a wholly owned Macau subsidiary to conduct its operations in China. In August 2006, the Company engaged the parent of its major tockshareholder in Hong Kong, Starlight International, to provide engineering and shipping services. In September 2006, the Company sold its wholly owned Hong Kong subsidiary, International SMC (HK) Limited ("ISMC") to See Bright Investments Limited.

As a consequence of the ISMC divestiture, and based on the opinion of the Hong Kong tax counsel, as well as "hold harmless" representations from the present shareholders of ISMC, the Company reversed the previously recorded provision of Hong Kong tax of approximately $2,453,000 in the quarter ended December 31, 2006. Such reversal has been presented in the income tax section of the accompanying Consolidated Statements of Operations.

We operate within multiple taxing jurisdictions and are subject to audit in those jurisdictions. Because of the complex issues involved, any claims can require an extended period to resolve. In management's opinion, adequate provisions for income taxes have been made.

As a result of the foregoing, we had net income of approximately $1,712 in Fiscal 2008 from operations as compared to a net income of 738,588 in Fiscal 2007 as a result of a one-time tax reversal of approximately $2.5 million in Fiscal 2007.

LIQUIDITY AND CAPITAL RESOURCES

On March 31, 2009, we had cash on hand of approximately $1.0 million compared to cash on hand of approximately $0.4 million on March 31, 2008. The increase of cash on hand was primarily due to the increase in trade and related party accounts payable of approximately $3.6 million offset by an increase in inventory of approximately $1.5 million, an increase in fixed asset investments of approximately $0.8 million and approximately $0.7 million to pay off the loans from related party. The increase of the inventory was a result of decreased domestic sales and increased product returns.

Cash from operating activities Fiscal 2009 was $1,027,810. The cash was generated primarily from increases in trade and related party accounts payable. We used the Company's common stock and vendor financing to offset portions of the cash requirement.

Cash used in investing activities for Fiscal 2009 was $747,844. Cash used in investing activities was for the purchase of tooling and molds, a new business computer system and warehouse equipment for our logistics operation.

Cash provided by financing activities was $229,381 for Fiscal 2009, which was due primarily to advances by DBS bank on our factoring facility offset by repayment of a working capital loan from various related parties within the Starlight Group.

As of March 31, 2009, our working capital was approximately $1.5 million. Our current liabilities of approximately $5.7 million include:

· Customer credit on account of approximately $908,449 - the amount will be offset by future purchases or refund.

· Accounts payable of $2,588,769 of which $1,300,000 was due to a major supplier in China.

· Related party loan of $1,498,391 due various parties within the Starlight Group.

As of June 15, 2009, our cash on hand is approximately $621,000. Our average monthly operating expenses are approximately $400,000 and we need approximately $1.2 million to cover our operating expenses during the next three month period. Our primary expenses are normal operating costs including salaries, lease payments for our warehouse space in California and other operating costs.

During the next twelve month period, we plan on financing our working capital needs from:

1) Equity investments - The Company is actively seeking equity financing to expand its business. We expect to raise additional capital as required for fiscal year ended March 31, 2010 ("Fiscal 2010").
2) Vendor financing - Our key vendors in China have agreed to manufacture on behalf of the Company without advanced payments and have extended payment terms to the Company. The terms with the factories are sufficient to cover the factory direct sales, which accounted for more than 60% of the total revenues.
3) Factoring of accounts receivable - The Company factors its accounts receivable for sales originated in the U.S. We are continually exploring better rates and terms with various banks, however the current facility with DBS Bank is considered adequate for Fiscal 2010 requirements.
4) Cost reduction - The Company has reduced significant operating expenses in recent years with the exception of fiscal 2009. The cost reduction initiatives are part of our intensive effort to achieve a successful turn-around restructuring. The Company plans to resume its cost cutting efforts in Fiscal 2010.
5) Bridge Loan - We may be able to raise additional short term bridge capital from Starlight International, the parent of our major stockholder, koncepts, who is also one of our suppliers.
6) Reduce cost of operation - The Company has incorporated SMC-L as a wholly-owned subsidiary to operate our California warehouse. For Fiscal 2010, SMC-L will renew an agreement with the Starlight Group to handle the logistics and fulfillment of Starlight Groups' domestic products for a service fee. This arrangement is expected to significantly offset the Company's own logistics expenses.

Our sources of cash for working capital in the long term are the same as our sources during the short term. If we need additional financing, we intend to approach different financing companies or insiders. However, we cannot guarantee that our financing plan will succeed. If we need to obtain additional financing and fail to do so, it may have a material adverse effect on our ability to meet our financial obligations and continue our operations.

During Fiscal 2010, we will strive to reduce additional operating costs. In order to reduce the need to maintain inventory in our warehouses in California and Florida, we intend to continue to ship a significant portion of our total sales directly from SMC Macau. The goods shipped directly to our customers from ports in China are primarily backed by customer letters of credit. The customers take title to the merchandise at their consolidators in China and are responsible for the shipment, duty, clearance and freight charges to their locations. In order to keep our inventory low, we have been helping our customers forecast and manage their Singing Machine inventories. This will prevent the overstocking situation with customers.

Except for the foregoing, we do not have any present commitment that is likely to cause our liquidity to increase or decrease in any material way. In addition, except for the Company's need for additional capital to finance inventory purchases, the Company is not aware of any trend, additional demand, event or uncertainty that will result in, or that is reasonably likely to result in, the Company's liquidity increasing or decreasing in any material way.

EXCHANGE RATES

We sell all of our products in U.S. dollars and pay for all of our manufacturing costs in either U.S. or Hong Kong dollars. Operating expenses of our former Hong Kong office were paid in Hong Kong dollars. Operating expenses of the Macau office are paid in either Hong Kong dollars or Macau currency (MOP) The exchange rate of the Hong Kong dollar to the U.S. dollar has been fixed by the Hong Kong government since 1983 at HK$7.80 to U.S. $1.00 and, accordingly, has not represented a currency exchange risk to the U.S. dollar. The exchange rate of the MOP to the U.S. dollar is MOP $8.05 to U.S. $1.00. We cannot assure you that the exchange rate between the United States, Macau and Hong Kong currencies will continue to be fixed or that exchange rate fluctuations will not have a material adverse effect on our business, financial condition or results of operations.

SEASONAL AND QUARTERLY RESULTS

Historically, our operations have been seasonal, with the highest net sales occurring in the second and third quarters (reflecting increased orders for equipment and music merchandise during the Christmas selling months) and to a lesser extent the first and fourth quarters of the fiscal year. Sales in our fiscal second and third quarter, combined, accounted for approximately 92.0%, 87.8% and 94.0 % of net sales in Fiscal 2009, Fiscal 2008, and Fiscal 2007.

Our results of operations may also fluctuate from quarter to quarter as a result of the amount and timing of orders placed and shipped to customers, as well as other factors. The fulfillment of orders can therefore significantly affect results of operations on a quarter-to-quarter basis.

We are currently developing and considering selling products other than karaoke category during the slow season to fulfill the revenue shortfall.

INFLATION

Inflation has not had a significant impact on the Company's operations. The Company has historically passed any price increases on to its customers since prices charged by the Company are generally not fixed by long-term contracts.

OFF BALANCE SHEET ARRANGEMENTS

None.

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